UK government must address bridging loan chaos

The UK government is under extreme pressure to address the growing problem of bridging loan repayments and refinancing. While it has been well publicised that the government has stepped in to back loans which may be at risk as a consequence of the coronavirus, there is a more deep-seated problem with bridging loans.

Housing move bridging loans

To all intents and purposes many areas of the UK housing market are on lockdown. The government has not gone as far as to ban property transactions but “advised” those looking to move home to delay completion. This has created a potentially huge problem for those who had previously acquired bridging loans while looking to sell one property and move to another. If the original property has not been sold, releasing funds to repay the bridging loan, the bridging loan would need to be rolled over. However, appetite for short-term bridging loans has reduced significantly in recent days.

So, there will be many private homeowners who are praying that the UK government steps in to tackle what could be a huge problem going forward.

Commercial bridging loans

There is even more of a problem when it comes to commercial bridging loans used to fund property projects whether simple renovations or multiple properties. The problem is simple; the property investors would have taken out finance to fund the original purchase then looked towards short term finance to fund renovations/building work. In a normal environment they would then look to refinance the property/properties on the higher value after work was completed. This would raise funds to pay off the relatively expensive bridging finance and replace this with traditional long-term less expensive funding. So, where does the problem lay?

Construction work stalls

While there is still some construction work ongoing across the UK, the vast majority of building sites have come to a standstill. As a consequence, those working against tight bridging loan finance repayment dates will struggle. The property/project, if work does not restart very soon, would likely be worth nowhere near their target value. As a consequence, they would not be able to raise as much traditional finance as expected which would usually be used to pay off the bridging loan. Indeed, when you also factor in the potential reduction in property prices on the whole there could be a huge shortfall.

It is all good and well the government backing loans which would otherwise have been approved without the coronavirus. However, the refinancing of bridging loans depends on the increased value of the properties in question. If work has not been completed then they won’t reach their optimum value and this could cause all kinds of problems when bridging loan refinancing dates arrive.

Summary

At some point the UK government will need to step in and address the problem of bridging loans. This has the potential to bring down the whole property market as some lenders have begun to withdraw from certain areas of the market. If the coronavirus lockdown turns out to be relatively short lived then there is the possibility that some investors will be able to refinance their bridging loans. However, at this moment in time it is unclear how long the lockdown will continue but there are suggestions it might be well into next year before things return to “normal”.


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